The Difference Between Usury & Interest

by Amanda McMullen, Demand Media

When your business borrows money from a creditor, the creditor will typically charge you interest. However, there are certain regulations that a creditor must follow when developing the loan contract and determining its interest rate. If the lender charges an interest rate that is higher than the rate allowed by law, he has committed usury.

Definitions

Interest refers to the fee a lender charges when she allows your business to borrow money. Most lenders calculate interest based on a percentage of the amount you owe on the loan. While some lenders charge a flat interest rate for the duration of your contract, others may charge a variable rate. Usury refers to interest that is higher than the maximum rate that the state allows lenders to charge.

Comparison

"Interest" is a general term that can refer to any percentage fee charged by a lender for his services, regardless of whether it is usurious. Usury, on the other hand, is a specific type of interest that isn't fair to the borrower. While the law permits lenders to charge interest, lenders can't require borrowers to pay interest at usurious rates. In fact, there may be legal repercussions for lenders who commit usury.

Legal Issues

Each state publishes its own lending regulations, so the maximum interest rate a lender can legally charge depends on the state in which she is lending. While some states publish a specific percentage that lenders can't exceed, others require lenders to stay within a certain range of the Federal Reserve interest rate on the date of the loan's contract. The penalties for usury vary by state and may also depend on the severity of the crime.

Considerations

Before the creation of usury laws, the term "usury" was simply another word for interest. National banks and federally chartered savings banks are exempt from usury laws. However, they must not charge interest rates that are more than a certain number of points higher than the Federal Reserve discount interest rate. Some installment plan lenders and small private loan companies are also exempt from state usury limits.

About the Author

Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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